HSBC’s $2B Share Buyback Rallied Investors

Investors have turned bullish on HSBC’s stocks with new announcement that the company will committing US$2 billion on share buyback in 2017.

Coupled with previous announcements, HSBC has pledged to buy a total of US$5.5 billion worth of stock in the past year, which signals management confidence in the company with a solid turnaround in its performance.

HSBC’s share price has reached a new high since the last financial crisis, and jumping by more than 3.0% upon news of the share buyback plans.

Mr Stuart Gulliver, the group’s Chief Executive has been cutting costs and trying to increase profit since he took charge in 2011, attempting to shrink and streamline the entire company with job cuts and sale of assets worldwide. He has exited from almost 100 businesses and stopped operations in 18 countries to cut costs.

Recent results were promising with a 5.0% rise in pre-tax profit to US$10.24 billion. Mr Gulliver is very satisfied with the new financial results stating that their “three main global businesses performed well” and that they “remain on track to complete majority of [their] strategic actions by the end of the year”.

HSBC’s first-half financial performance was boosted by increasing interest rates and recovering trading environment. It was able to report a 3.0% loan growth in the second quarter despite previous difficulties of increasing this number.

HSBC is looking for additional boost to its lending operations from an increase in interest rate in Hong Kong, in-line with the rising rates in the US.

Backing HSBC’s positive performance is its global banking and markets unit which increased by 31%, coupled with a 16% increase in its income from services (e.g. debt and equity underwriting).

Furthermore, HSBC’s common equity tier one ratio, a measurement of the bank’s balance sheet strength increased from 14.3% to 14.7% which exceeded analysts’ expectations of its ability to generate capital to strengthen its balance sheet.

Its earnings per share of 35 cents also exceeded analysts’ forecast and explains the jump in share price. However, its trading business continues to face setbacks with a 6.0% decline as the entire industry faced a bad quarter.

HSBC still faces uncertainty in the UK with on-going Brexit negotiations that seems to remain “complex and time-consuming”. Expecting slower growth rate, a weaker pound, and growing weariness of over consumer indebtedness, HSBC’s financial outlook in the UK for the future may not be as promising.

With Mr Gulliver set to retire next year, investors will be waiting to see if the new successor will be able to continue this turnaround story and report consistent profits over the next few years.

Though not listed on the SGX, investors may still consider investing in HSBC for potentially higher dividends and more share buybacks in the future as Mr Gulliver has said that they will use more buybacks in case of surplus capital.

Our regular columnist and event keynote speaker Dr Chan Yan Chong wrote a commentary about HSBC and its stock price, read more here.